Money Metrics: Waterfall Projections

One of the most common activities at any company is financial planning. On a regular basis, most companies will estimate how much revenue they will generate in the foreseeable future and how much they will spend in that same time. Depending on the size and maturity of your business, these might be complex estimates predicting years in advance, or simple projections a few months into the future.

Whatever your method of financial projection, the real question is how good are your projections?

Ummmm… I’m not entirely sure.

I’m here to help! A waterfall analysis is a way of tracking your projections over time and eventually comparing them to reality when the time comes. It’s actually quite simple to do! Once you have your monthly projections done, every month you revisit those projections and see if the current month projection was correct and update future projections as necessary.

The reason it’s called a waterfall is that you line up the changes to your projections over time so that you can see how your projections change and how accurate they were when the time comes. Below is an example of a waterfall projection:

Monthly Projections

Jan

Feb

Mar

Apr

May

Jun

Jul

Jan

$1,000

$1,200

$1,500

$2,000

$2,700

$3,500

$4,500

Initial Projections

Feb

$1,000

$1,500

$2,000

$2,700

$3,500

$4,500

Mar

$1,200

$2,000

$2,500

$3,300

$4,200

Apr

$1,500

$2,200

$3,100

$4,000

May

$2,000

$3,000

$3,500

Jun

$2,500

$3,000

Jul

$3,000

Actuals

Each row is a projection over time, as set in that month. The row for January shows the initial projections for each upcoming month as they were in January. As you look down each column, you can see that projections change over time. For example, the projections as set in May (i.e., looking across the row labeled “May” for the remaining months) are very different (lower) than they were in January (i.e., looking across row labeled “January” row for the remaining months)!

In this particular example we can see a few different things:

The initial projections were too high, as they consistently overestimated the actual results.

It took a few months before the projections were adjusted in light of the lower performance, but even when they were adjusted (Mar, Apr, etc.) they were still too high!

The end result is that the projection for July made in January was 33% higher than actual July results! Clearly we need to revisit the planning process.

Waterfall projections are a handy tool to use as part of any planning process, financial or otherwise. If you are doing it right, your projections should be getting better over time!

Quote of the day: “Don’t go chasing waterfalls / Please stick to the rivers and the lakes that you’re used to / I know that you’re gonna have it your way or nothing at all / But I think you’re moving too fast” – TLC, Waterfalls